China, itself under layers of United States tariffs and sanctions, is quietly defying US strictures against buying oil from Iran. The Trump administration, recognizing it has already reduced its leverage with China, was weighing imposing more tariffs as punishment or pre-emptively granting Beijing a waiver from sanctions and focusing on limiting Iran’s export volumes. If the US goes down the second path it would constitute a major step down by the US and open the door for other countries, including India, to ask for similar waivers.
Kpler, a firm that tracks oil tankers, reported Iran delivered its second oil consignment to China in late June. Iran managed to transfer 545,000 barrels of crude to different oil tankers each day last month. While this was just over half of what it used to export, it still constituted a major breach of the US sanctions. A smaller amount, about 34,000 barrels, is presently on its way to Turkey, another regime with a domestic interest in defying the US. "The rest of the Iranian oil loaded on tankers last month is either pinned down in the Iranian territorial waters or in Fujairah port, United Arab Emirates, in the Persian Gulf," Kpler said. Iran has developed an array of techniques, including turning off its ships’ GPS systems, to find means around the sanctions.
The US-Iran confrontation is headed for an impasse. Iran announced in early July it had begun enriching uranium to above the limits set by the Iran-US nuclear deal though well below weapons-grade levels. The US issued sanctions against senior Iranian leaders but avoided doing so against the Iranian foreign minister as that would scuttle any chance of negotiations. Europe tried to offer enticements to keep Iran within the terms of the nuclear deal, setting up a special financial entity to allow European companies to continue to do business with Tehran. But the Iranian foreign minister called the efforts insufficient, especially since the entity would still not allow Iran to continue to export oil. Later, Iran shot down a US drone that it claimed had trespassed into its airspace. Washington claimed the drone was in international airspace. Trump reportedly personally called off a retaliatory strike at the last minute.
The crisis is having minimal impact on global oil prices thanks to record US shale production and market expectations of weak global demand. The G-20 summit made almost no reference to Iran’s threat to shut down the Strait of Hormuz. Despite the Organization of the Petroleum Exporting Countries having cut production and Venezuelan and Iranian exports being slashed, oil price futures have remained in the $ 60 to $ 70 barrel range and global stocks have remained high.
The sanctions have taken a toll of Iran’s economy. The IMF predicted in spring that the Iranian economy would shrink about 6 per cent. But the costs are insufficient to make Iran change its nuclear policies or dismantle its regional network of Shia militia — the key demands of the US and Arab countries like Saudi Arabia. Iran’s economic problems are partly of its own making. Most of its oil wells are mature and in the second half of their lives. Its oil production is naturally depleting 8 to 11 per cent a year. Iran’s volatile regulatory environment and sanctions have meant few international investors have developed new fields. The country has also failed to build domestic refineries. As only about 40 refineries in the world are designed to handle Iranian crude, the country is overly susceptible to sanctions. Reportedly this is why Tehran, while agreeing to China investment in the South Pars Phase II field in return for 17.5 per cent of the production for nine years, has also demanded China increase its production in its existing fields in West Kharoun by a half million barrels or more.
July 15, 2019